Question

What is/are the purpose/purposes of the ‘Marginal Cost of Funds based Lending Rate (MCLR)’ announced by RBI?1. These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances.2. These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.Select the correct answer using the code given below.(a) 1 only(b) 2 only(c) Both 1 and 2(d) Neither 1 nor 2

Answer 1

Holla


Correct option is b). 2 only


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Answer 2

Answer: Option (c) Both 1 and 2

Explanation:The marginal cost of funds based lending rate or the MCLR as commonly used, refers to the minimum rate of interest charged by a bank below which it cannot lend. Although in certain cases RBI may allow it to do away with the MCLR rate. It is regarded as the reference or standard rate for the bank. MCLR is a method through which the bank decides the minimum interest rate for loans . This rate depends upon the marginal, incremental or additional cost of  organising  more funds to the eventual borrower.

MCLR replaced the base rate which was in force since July 2010. The new methodology was introduced from 1st April 2016 by the Reserve Bank of India.

There were certain reasons for the introduction of MCLR .One of the foremost was as there rates were based on marginal cost of funds , they were more in tune to any susceptible changes in the policy rates. Thus leading to proper and effective application of monetary policy. Prior to MCLR system every bank followed different ways for calculating  base rate  or minimum rate.  

MCLR guidelines helped in improving the transparency in the methodology followed by banks for determining the interest rates on advances and also ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks.